Reimbursement Fraud, Defending Your Company against Expense Reimbursement Fraud

Defending Your Company against Expense Reimbursement Fraud

The last line of defense your company has against expense reimbursement fraud may come from your bookkeeping department. While supervisors and managers often review expense reimbursements, the bookkeeping department can provide a different point of view. By reviewing supporting documentation for sufficiency and reasonableness, a bookkeeping department may also be able to spot potential expense reimbursement fraud just by the nature of the expense.

Common Forms of Expense Reimbursements

Expense reimbursements typically happen in one of two ways;

Use of Corporate Funds: Either an employee has a corporate credit card or has been given petty cash to make purchases. Employees would be required to submit documentation for all credit card purchases or petty cash expenditures.

Use of Personal Funds: In some cases, employers may encourage the use of personal credit cards to pay for business expenses incurred by the employees. This may be done as a means to encourage receipts and reimbursement requests to be turned in timely. Since an employee may lose out if documentation is not submitted, they may be more willing to submit such documents as they run the risk of not being reimbursed.

What is Expense Reimbursement Fraud?

Anytime that an employee submits a request for reimbursement of an expense that is not business related, this is a form of fraud. This can happen either using company funds, such as corporate credit cards or through the use of an employee’s personal funds. In addition, altered or fake receipts, as well as submitting duplicate requests, constitutes fraud.

What can a business do to protect itself?

While nothing is foolproof, a business can start first with defining and communicating its expense reimbursement policy to its employees.

Formalize a written expense reimbursement policy: Whether this is included within an employee handbook or a separate policy statement, clearly document what your expense reimbursement policy is. Within a typical expense reimbursement policy, employers often include;

  • What types of expenses are considered business and subject to reimbursement?
  • Is there an approval process required prior to an employee incurring the expense?
  • What type of documentation is required to be maintained in order to be reimbursed? Meal and entertainment expenses, for example, should include documentation as to who attended the meal, the purpose of the meeting, and what was discussed. Without such documentation proving the nature and intent of the meal, an employer may not be able to deduct the expense on their tax return.
  • If your company requires frequent travel, consider specifically addressing travel related expenses within your policy. This could include preferred vendors to use, such as hotels or rental cars, or limitations on amounts nightly amounts for hotels.
  • Consider a timeframe. Requiring expense reimbursements and documentation to be submitted within a certain time period of the expenditure helps to keep your books and records current. It can also serve as a reminder that failure to submit receipts timely may result in the loss of a corporate credit card use.

Another helpful step would be to include verbiage on the policy stating that the employee has read the policy and agrees to abide by its contents. Their signature will serve as an acknowledgment.

Document your process: Do employees need to fill out a form or submit requests electronically? Is documentation required for every expense or just those over a certain dollar amount? Is written approval required?

In some cases, employers may implement a system that allows an employee to submit requests and receive approvals electronically. If that is the case, does this system allow for sufficient documentation and review? While electronic systems can help monitor expense reimbursements, consideration should be given as to the quality of the documentation. Photocopied and scanned receipts can be easily manipulated. Numbers can easily be changed, which may be hard to detect on photocopies or scans. Requiring original receipts, however, helps to remove the risk of manipulation.   Original receipts also remove the ability to submit duplicate requests.

Even with a formal written policy in place, fraud can still occur within expense reimbursements. Employers can implement the following practices to help mitigate potential fraud;

Review corporate credit card policies and usage – For employees that have corporate credit cards, periodically review their level of activity each year. Consider the purpose of the card with the credit limit established. Lower credit limits on each card can help to control the volume of purchases made.

Establish guidelines as to what positions require a corporate credit card and for what purposes. Employees that change to a role that no longer requires the use of a credit card should turn these in. By establishing the typical expenses that each position would typically use a credit card for can help when monitoring the statement. For example, a salesperson may use their card for travel-related expenses. Charges that appear to be for tools or equipment would be unexpected for that role and should be investigated.

Bookkeeping and accounting departments can be especially helpful at this level of review if they have established guidelines as to what credit cards are typically used for.

Require two levels of review – While this may be challenging in smaller businesses, using two different levels of review can help to detect and deter expense reimbursement fraud. Many times, the employee’s direct supervisor serves as the first level of review. The second level may come from the bookkeeping department or even the owner of the company.

Spot check purchases – From time to time, the level of review should extend beyond just looking at paperwork. Ask to see the physical piece of equipment, tool, or supplies that were bought. Ensure that what was purchased is actually being used in the business. As an extra control, select a few items from older credit card statements to inspect to see if they are still being used.

Management’s Tone – One of the most important controls that a business can put in place is how management reacts to and enforces policies. Corporate environments that promote honesty can go a long way to helping to prevent expense reimbursement fraud.   Although this may be uncomfortable for some business owners, holding employees accountable for fraud is a must. This may mean termination or legal action. How employees view management’s reactions to expense reimbursement fraud can act as a deterrent in itself.

While policies and procedures can help to deter fraud, they are not fool-proof. Management’s active involvement in the reimbursement process is necessary to help communicate the importance of timely submissions as well as the requirement that only expenses incurred for business purposes may be incurred.

Since 1990, Valley Business Centre has delivered expert bookkeeping and payroll services to small and medium-sized businesses. We work with clients located in Whistler, Squamish, the Sea to the Sky corridor, BC, and beyond. Whether you need help with maintaining your books or running payroll, contact the bookkeeping specialists at Valley Business Centre today.

 

 

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